[Guide to the Market Economy] Government Intervention

“When Bengal faced a rice shortage, government price controls made the problem worse;

the market resolves mismatches between supply and demand better than the government”

We draw countless lessons from the history of success and failure and gain the wisdom to live in the present. The same is true in economics. “The History of Bengal’s Countryside,” which appears in the Mary Rashi Report, reminds us of the need for serious reflection and discussion about the role of government.

The Failure of Government Intervention as Seen in Bengal

In 1770, southern Bengal suffered a severe food crisis due to a failed rice harvest. At the time, the Bengal government implemented a policy aimed at preventing merchants from speculating in rice and keeping rice prices stable by banning the monopolization of grain. At first, the government’s policy seemed to work effectively. Grain prices did not soar and remained stable at 0.75 pence.

However, because the public’s rice consumption was not restrained and the efficiency of rice supply declined, the shortage of rice grew more severe over time. By the later stage of the famine, grain prices had surged to as high as 4 pence depending on the region, ultimately causing a horrific disaster in which more than 30% of the population starved to death. In this way, the Bengal government’s attempt to adjust the market ended in complete failure.

A hundred years later, in 1866, Bengal was struck by famine once again and suffered another severe food crisis. This time, in order not to repeat the failure of a century earlier, the Bengal government adopted a completely different policy. It did not control hoarding and instead announced weekly price fluctuations in every region, thereby promoting market transactions. The result was a great success. As choice and competition worked together, food moved actively from relatively food-abundant areas to food-scarce areas. Rice supply and consumption adjusted efficiently and flexibly, which helped keep prices stable, and no tragedy like mass starvation occurred even in the later stages of the famine.

When Prices Were Not Controlled, Supply Increased Further

In 1770, the Bengal government disastrously failed by intervening in the market with policies that controlled prices and suppressed consumer choice. In contrast, in 1866, it adopted the opposite policy and not only avoided repeating the disaster but overcame it successfully. The reason Bengal was able to avoid repeating the calamity was the autonomy of the market.

As this shows, excessive and indiscriminate government intervention in the economy can be poisonous. The government should be responsible for areas that the market cannot directly solve, such as public goods, national defense and public order, and externalities, and should never interfere recklessly in the market. Problems in the market should be left for the market to solve. This is proven by the Bengal government’s two choices in 1770 and 1866 and their respective outcomes.

At times, we mistakenly think of government as if it were an all-purpose problem solver. But government is not an all-powerful fixer, nor is it a perfect and infallible institution. It is an administrative apparatus that formulates and implements policy, not a specialized economic body, and if it gets things wrong, it can disrupt market order and damage the economy. That is why Adam Smith advocated the night-watchman state, limiting the role of government to national defense, diplomacy, and public order.

What happens if government intervenes too deeply in the market? The more the government takes a leading role in the economy or acquires the power to intervene and impose sanctions, the greater the likelihood of failure. For example, have not national economic development plans repeatedly failed whenever they were attempted? Countries with colonial experiences in the past implemented economic development plans in pursuit of rapid growth, but with the exception of Korea and Taiwan, they did not succeed. China in particular carried out the Great Leap Forward for 3 years, but far from developing the economy, it ended up setting it back from where it had been before.

Why Did Only Korea and Taiwan Succeed?

The reason only Korea and Taiwan succeeded as exceptions was that they adopted the market economy as their basic system while actively promoting openness and trade expansion. In other words, it was not central economic planning but the free market economy that led the economic growth of Korea and Taiwan. It is better for the government to step back from the market and play a supplementary role in addressing economic problems that the market cannot solve on its own. In economic matters, the government should serve as a supporter that helps the market function smoothly. Rather than becoming the master of the market, the government’s true role is to help the market function in a stable manner.

■ Let’s Think About It

During the poor harvest of 1770, the Bengal government controlled prices to prevent a spike in prices. It believed that keeping prices low would lessen the burden on the people. But because prices were low, the supply of rice fell. As a result, the famine claimed countless lives. During the poor harvest of 1866, the Bengal government left prices alone. Seeing high prices, suppliers began bringing rice to market. Supply increased, and prices fell.

Sung-no Choi

President, Center for Free Enterprise (CFE)

---

Original title: [시장경제 길라잡이] 정부개입

Author: Sung-no Choi

Date: 2018-12-10

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=15&idx=11330